By Stephanie Allgeyer, CPA, CFE, VonLehman
Nonprofit organizations that receive government contracts or grants may be hit hard by the overtime rules that go into effect in December. Many of them have agreements that obligate them to provide services at fixed reimbursement rates that won’t reflect the higher costs resulting from the new rules. This article addresses those concerns and offers two solutions promoted by the National Council of Nonprofits.
The U.S. Department of Labor’s (DOL) long-awaited final overtime rule will have a significant effect on practically every industry and profession in the country.
And the nonprofit sector isn’t immune. Managers in the sector actually may be scrambling later in the year to comply with the requirements, which go into effect on December 1, 2016. Major changes may be required, particularly as the final rule relates to government grants and contracts.
A recent report by the National Council of Nonprofits (NCN) addresses these concerns and offers solutions government units and funders may have to take.
Background information
Under the new DOL rule, the standard salary level used to determine whether executive, administrative and professional employees and computer professionals are eligible to receive overtime will increase from $455 per week ($23,660 per year) to $913 per week ($47,476 per year) for a full-time worker beginning in December. In light of this, the NCN surveyed organizations with government grants and contracts asking for practical insights on putting the new rules into effect.
Its report on the survey refers to “operational anxiety” among groups trying to figure out how to pay the new required additional costs in very tight, or even declining, revenue environments while providing the same level of services. It concludes that government units may have to be convinced to make accommodations in order for nonprofit organizations to maintain their current levels of service.
The report is widely viewed as a “call to action” for the network of state associations the NCN represents.
Uncertainty and misunderstandings
Because of the uncertainty over the new rules — and misunderstandings in some quarters — certain groups are likely to be affected more than others. This could include organizations where demand for services is unpredictable (for example, groups involved in crisis response or caring for the elderly and disabled), and groups who rely on small donations to keep running. These nonprofits complain that they can’t expect donors to increase contributions just to compensate for higher salaries. And of course, reductions in staff or cutbacks in hours aren’t appealing options for many organizations.
More than half of the 1,000 survey respondents represented human services providers. Arts and education nonprofits comprised another 19%. Most of those surveyed had an annual operating budget between $1 million and $10 million.
The vast majority of respondents reported that their existing government contracts don’t take these higher costs into account. And unlike for-profits that can raise prices or governments that can raise taxes or cut services, nonprofits with government grants and contracts typically are contractually bound to provide services at fixed reimbursement rates that won’t reflect the higher costs imposed by the new overtime rule.
Two solutions
According to the report, 69% of respondents said there isn’t a provision in their existing grants and contracts to reopen or renegotiate the agreements to secure additional reimbursements. Moreover, 28% weren’t sure if their contract allowed adjustments, while just 3% were certain such a clause did exist. One-third of respondents said they expect to cut staff and services to cover the higher costs.
The report offered two solutions to the “conundrum” presented by the new rules:
- Grant and contract reopeners. Nonprofits need ways to reopen or renegotiate government grants and contracts either to receive reimbursement rates that incorporate the increased costs or to adjust performance obligations.
- Short-term transition support. Private funders can provide additional resources during the interim phase of putting the rules into effect (the first couple of years) and offer emergency funds that will enable groups they support to conduct compliance audits, develop updated job descriptions, implement time-management systems, and make other upgrades to human resources systems.
Government revisions needed
Since the new costs are the result of changes to federal law, the NCN says it seems appropriate for the federal government to give direction to government program officers at the federal, state, tribal and local levels on how to revise existing grants and contracts to ensure that nonprofits are treated fairly.
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Different Strokes …
The Department of Labor issued additional guidance relating to two types of employers in the nonprofit sector.
- Educational institutions. Under a special exemption, many white-collar employees at higher education institutions aren’t subject to the salary level test or are subject to a different salary level test. Therefore, the new salary level won’t affect them.
For instance, the requirements for a white-collar exemption don’t apply to bona fide teachers. In addition, an alternative salary level governs academic administrative personnel that help run higher education institutions and interact with students outside the classroom. These personnel are exempt from the overtime requirements if they are paid at least the entrance salary for teachers at their institution.
- State and local governments. There are several provisions unique to state and local governments relating to compensatory time (comp time). Notably, state or local government agencies may arrange for their employees to earn comp time instead of cash for overtime hours.
Most state and local government employees may accrue up to 240 hours of comp time. Law enforcement, fire protection and emergency response personnel, as well as employees engaged in seasonal activities (such as employees processing state tax returns), may accrue up to 480 hours of comp time. An employee must be permitted to use comp time on the date requested unless doing so would “unduly disrupt” the operations of the agency.
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